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Mysteries of Job Creation

There is considerable misunderstanding about the process of job creation. Adam Smith provided clear insights into how specialization & division of labor is the key to economic growth that bring increased wealth & income along with more jobs.

Unfortunately, there are many, especially in the political classes, which believe that governments can “create” jobs. What they overlook is that if governments grant any payment or service, they must first take away the equivalent amount (or more!) from some other citizens. As such, a job “created” by government is offset by the lost opportunity of a job created elsewhere in the economy so that there can be NO NET gain.

In a recent article (Nick Hanauer, “Rich Americans Aren’t the Real Job Creators”), a self-described “capitalist” asserts that “that rich people in general — and business-people in particular — are not job creators”. He makes the uncontroversial suggestion that “jobs are the consequence of the feedback loop between customers & businesses”.

But he follows this up with an incoherent claim that suggests it is better to place a heavier “burden of taxes” on top income earners.

But it is not clear that there are efficiency gains from placing a greater relative burden of taxation on ANY group, whether defined by income or any other metric.

This assertion follows Keynesian logic that reflects outmoded thinking. Once when “rich” people did not spend a certain amount of their income, these funds could be removed from the economic system since individuals were allowed to hold gold money.

Since the “barbarous relic” no longer serves as money, funds not spent find their way into the financial system. In that sense, there is no real danger of “hoarding”.

In all events, it is chimerical to claim that handing over larger chunks of income to government can lead to efficiency gains or even boost aggregate demand. That is, unless one believes that governments spend money more wisely & with less “waste” than private individuals. It is easier & more fun to believe in the “tooth fairy”.

There is more confusion about the nature of capitalists & entrepreneurs. In understanding that a capitalist is the owner of capital, the following comment misses the point.

“Capitalists are idea creators, not job creators.”

Capitalists need not be job creators, as such, for it is entrepreneurial actions that are the basis of economic growth that leads to the creation of wealth & jobs.

He is on to something in another comment:

“Finding clever ways of securitizing imaginary assets may not create a lot of social utility. Finding cheap ways of converting the sun’s rays into electricity unquestionably does.”

It turns out that he senses a symptom of a problem that he cannot define. What has been happening is that central bank policies to push down interest rates so aggressively have caused a massive shift of wealth from the industrial sector to the financial sector.

In turn, this is the main story about the “rich getting richer” while other’s incomes have lagged. So, the massive increases in wealth & the skewed distribution of income should be seen as a matter of central bank policies rather than a market failure.

But an exploration & explanation for all this is a matter for a future blog entry….

About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.